Friday, March 19, 2010

The Social InSecurity Game Is Afoot!

Social Security: "Here It Comes"
Now the interesting part of the game begins....
This year, for the first time since the 1980s, when Congress last overhauled Social Security, the retirement program is projected to pay out more in benefits than it collects in taxes -- nearly $29 billion more.
In a world where we talk about trillions, this doesn't sound like much. But it's not the amount that's the problem - it's the direction.
For decades government has cooked its books by stealing the Social Security taxes you pay. This was the infamous "lock box" debate had during Gore's campaign. Too bad Mr. "the world's getting hotter so I have to live in my 20,000 sqft mansion with the AC blasting in all 79 rooms" Gore decided to make a partisan political issue out of something that his boss (that would be Herr Clinton) had practiced himself to make the (false) claim that he had run a surplus!
There was no surplus in the 1990s folks. Clinton, like the Presidents before and after him (from both sides of the aisle) simply stole the FICA tax receipts, replacing them with non-marketable bonds.
If you're wondering why we have hinky accounting in our banks, a good part of the reason is that our government cooks the hell out of the books themselves.
There's little reason for private business to behave ethically when our government won't, and there's little risk of prosecution when the scamming starts at the very top.
In order for the government to redeem these bonds it will have to issue more marketable debt, dollar-for-dollar. So if you look at the "Debt To The Penny" screen, what will begin to happen is that the "Intragovernmental holdings" (and boy are they mental) will shrink a bit, while the "Debt Held By the Public" line will of course grow.
This is all fine and well provided that (1) the first doesn't run out and (2) the government doesn't have trouble selling the debt in the second.
The NY Times perpetuates the "big lie" about FICA, specifically:
Social Security is financed by payroll taxes -- employers and employees must each pay a 6.2 percent tax on workers' earnings up to $106,800. Retirees can start getting early, reduced benefits at age 62. They get full benefits if they wait until they turn 66. Those born after 1960 will have to wait until they turn 67.
Bull. Employees pay 12.4%. Each and every one. If you're self-employed, you pay it all right up front. But if you work for someone else, they reduce your salary (or hourly wage) offer by 6.2%. You pay it, not the employer. No business ever pays a penny in tax - it is always shifted to the person that it allegedly "benefits" or "costs", and in this case that's you.
The problem with Social Security (and Medicare) is that the boomers number 78 million and comprise the largest block of our demographic. As they shift from working to retired over time there will be paradigm shifts in both entitlement program funding and private investment. Boomers, even with the "great recession" dives in their portfolios (before you cheer about the "recovery" in the market, realize that it's still 30% off the recent high in 2007, and the Nasdaq is more than 50% off its all-time high in 2000!) still have considerable wealth in their portfolios. Those who didn't play ATM machine with their house have wealth there. All of this will get tapped and dissipated as these people age out of the workforce. It is inevitable.
During the "salad years" of the boomers, roughly 50 years of age to 60 or thereabouts, they have tremendously added to market values of, well, virtually everything. These are widely regarded as the peak earnings years for most people. Starting in 1946 the peak began in 1996 and with the end in 1960 the "tail" of the boomers hit the start of their peak years this year - in 2010. But the "Great Recession" has truncated many of these people's peak years, as the most expensive employees are often the first to be let go and the last to be rehired during bad times - so it remains an open question whether those born in the early 1960s (of which I am one) will indeed hit our "peak years" as expected, or whether we just had one of our earning hands chopped off. Time will tell.
In any event in another 10 years that peak will have passed, and the boomer generation will have entered the "Draw It Down" period in their lives. This is an inexorable process, and one that cannot be prevented. Nearly 80 million people shifting from squirrels socking away nuts to eating those nuts is going to change many things, and market valuations for various assets will be one of the larger changes that most people are entirely unprepared for.
More than a decade ago I wrote a paper called "Investable Capital" which, unfortunately, I no longer have available for republication. What's worse is that some of the data set has been lost - at least I think it has. I expected that the negative FICA draw would begin in 2015, and that this would make a major shift in all market valuations. We're five yeas ahead of that time, largely due to the bubble-blowing. The original paper saw the Internet Bubble (because it was nascent at the time) but did not predict what Bush and Greedspan would do to try to arrest the effect of it popping.
We talk about ratings agencies downgrading the US Debt - they should have done it a decade ago. Why? Because we continually call the debt-to-GDP ratio as $12.57 trillion to ~$14 trillion "right", or 89.8%, while ignoring the claimed amounts of the Social Security and Medicare promises. But unless you're going to tell Granny that she's not going to get her check (or her health care), along with the 80 million boomers (all of who will instantly vote out anyone who tries to tamper with those programs, whether the money exists or not!) those "promises" are real.
So what's the real debt-to-GDP ratio of the federal government? About 500%, if one assumes the forward liabilities are on the low end of CBO and private estimates, or $60 trillion. This makes the total "debt" $72 trillion dollars and the ratio 514%!
No nation has ever managed to pull that off past the point of recognition of these costs. The reason is simple - interest costs. Compute the damage that, say, 5% interest imposes on $72 trillion and you blanch immediately (that's $3.6 trillion by the way, or more than our entire federal budget!) We get away with not paying that by sleight-of-hand, effectively playing "Option ARM" and adding to the principal. But all Option ARMs have a recast point. We're just not sure where this one is.
Once the "recognition point" happens the decline in all asset classes becomes both relentless and instantaneous. The power of self-delusion is powerful, but it cannot overcome the math - not in the long term.
The Government's view?
Good luck to the politician who reneges on that debt, said Barbara Kennelly, a former Democratic congresswoman from Connecticut who is now president of the National Committee to Preserve Social Security and Medicare.
''Those bonds are protected by the full faith and credit of the United States of America,'' Kennelly said. ''They're as solid as what we owe China and Japan.''
China and Japan aren't going to get paid either.

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